Note 35 Financial risks and financial policy

Finance and treasury

The Group is exposed to various types of financial risks through its operations. The term financial risk refers to fluctuations in the company’s profit and cash flow resulting from changes in exchange rates, interest rates, refinancing and credit risks. Group finance and treasury is governed by the financial policy established by Peab’s Board of Directors. The policy is a framework of guidelines and regulations in the form of a risk mandate and limitations in finance and treasury. The Board has appointed a finance and treasury committee which is chaired by the Chairman of the Board. It is authorised to make decisions that follow the financial policy in between meetings of the Board. The finance and treasury committee must report any such decisions at the next meeting of the Board. The Group Function Finance and Treasury and the Group’s internal bank Peab Finans AB manage coordination of Group finance and treasury. The overall responsibility of the Finance and Treasury function is to provide cost-effective funding and to minimise the negative effects on Group profit due to the price of financial risks.

The liquidity risk refers to the risk of Peab having difficulties in meeting its payment obligations as a result of a lack of liquidity or problems in converting or recieving new external loans. To ensure access to liquid funds binding credit facilities are contracted. The Group has a rolling one-month liquidity plan for all the units in the Group. Plans are updated each week. Group forecasts also comprise liquidity planning in the medium term. Liquidity planning is used to handle the liquidity risk and the cost of Group financing.

The objective is for the Group to be able to meet its financial obligations in favorable and unfavorable market conditions without running into significant unforeseen costs. Liquidity risks are managed centrally for the entire Group by the central Finance and Treasury function and the liquidity available at the year-end is presented below.

Available liquid funds

Group, MSEK 2016-12-31 2015-12-31
Liquid funds and bank holdings 1,062 873
Unutilized overdraft facilities 1,000 1,080
Other unused credit lines 4,000 3,000
Total 6,062 4,953

The financial policy dictates that Group net debt should mainly be covered by loan commitments that mature between 1 and 7 years. At the end of the year, the average loan period for utilised credits was 62 months (35), for unutilised credits 29 months (25), and for all granted credits 45 months (31). In 2015 Peab refinanced its basic financing, a credit facility totaling SEK 5,000 million with a new credit facility of SEK 4,000 million with better terms. The new contract runs until September 2018 with the option to extend it one plus one year. In 2016 the option to extend it for one year was used which means the contract runs until September 2019. This loan facility is supplemented by capital market financing, other kinds of short-term operations financing, project-related credits and financial leasing. The loan agreements contain financial covenants in the form of interest coverage ratios and equity/assets ratios that the Group must meet, which is standard for this kind of loan. Peab exceeded the key ratios by a broad margin at the end of the year.

Peab set up a lending program for commercial papers in 2004. Under the program, Peab can issue commercial papers for a maximum of SEK 3.5 billion. The borrower is Peab Finans AB and the guarantor is Peab AB. At the end of the year, Peab had outstanding commercial papers worth SEK 1,329 million (1,206).

In February 2012 Peab received FSA approval and registration for the issue of Medium Term Notes (MTN) with a loan limit of SEK 3 billion. In 2016 new bond loans were issued with a nominal value of SEK 350 million (300) under the MTN program while bond loans with a nominal value of SEK 1,000 million (600) matured during the year. At the end of the year Peab had outstanding bonds with a nominal value of SEK 1,000 million (1,650).

Total credit commitments, excluding unutilized leasing lines, the unutilized part of the certificate program and the unutilized part of MTN-program amounted to SEK 10,022 million (10,481) per 31 December 2016. Of the total credit commitments SEK 5,022 million (6,400) was utilized .

Age analysis of financial liabilities, undiscounted cash flow including interest

 Group 2016, MSEK Currency Average interest rate on balance sheet day, % Nominal value, original currency Amount SEK Matures 2017 Matures 2018 Matures 2019 Matures 2020 Matures 2021 Matures 2022-
Bank loans SEK 1.1 920 920 245 176 146 158 144 51
Bank loans NOK 3.0 336 354 184 153 3 5 5 4
Bank loans EUR 1.0 93 893 67 303 5 5 5 508
Commercial paper SEK 0.2 1,331 1,331 1,331
Bonds SEK 1.3 1,024 1,024 362 106 204 352
Financial leasing liabilities SEK 1.0 407 407 90 128 166 15 5 3
Financial leasing liabilities NOK 2.4 175 184 45 47 36 28 15 13
Financial leasing liabilities EUR 1.8 3 26 9 12 5
Total interest-bearing financial liabilities 5,139 2,333 925 565 563 174 579
Accounts payable SEK 3,696 3,696 3,696
Accounts payable NOK 586 618 618
Accounts payable EUR 17 160 160
Other liabilities SEK 173 173 90 23 4 33 21 2
Other liabilities NOK 9 10 6 4
Other liabilities EUR 1 14 14
Interest rate swaps SEK 102 56 28 6 5 4 3
Total non-interest bearing financial liabilities 4,773 4,640 51 10 38 25 9
Total financial liabilities 9,912 6,973 976 575 601 199 588

Group 2015, MSEK Currency Average interest rate on balance sheet day, % Nominal value, original currency Amount SEK Matures 2016 Matures 2017 Matures 2018 Matures 2019 Matures 2020 Matures 2021-
Bank loans SEK 1.2 2,342 2,342 127 71 1,592 129 147 276
Bank loans NOK 3.7 162 155 130 1 10 6 8
Bank loans EUR 1.9 78 710 375 69 4 4 3 255
Commercial paper SEK 0.3 1,207 1,207 1,207
Bonds SEK 1.7 1,690 1,690 1,025 360 104 201
Financial leasing liabilities SEK 1.7 366 366 6 23 6 5 28 298
Financial leasing liabilities NOK 1.9 107 102 5 6 20 16 19 36
Financial leasing liabilities EUR 1.7 2 20 3 1 16
Total interest-bearing financial liabilities 6,592 2,878 531 1,752 361 205 865
Accounts payable SEK 3,469 3,469 3,469
Accounts payable NOK 402 384 384
Accounts payable EUR 14 127 127
Other liabilities SEK 191 191 177 9 2 3
Other liabilities NOK 15 14 14
Other liabilities EUR 2 20 20
Interest rate swaps SEK 134 70 42 18 3 1 0
Total non-interest bearing financial liabilities 4,339 4,261 51 20 3 1 3
Total financial liabilities 10,931 7,139 582 1,772 364 206 868

Interest rate risk

The interest rate risk is the risk that Peab’s cash flow or the value of financial instruments may vary with changes in market interest rates. The interest rate risk can result in changes in fair values and cash flows. A crucial factor affecting interest rate risk is the fixed interest period. On 31 December 2016, interest-bearing net debt amounted to SEK 1,862 million (3,118). Interest-bearing liabilities amounted to SEK 5,022 million (6,400), of which SEK 2,294 million (3,099) were short-term. The financial policy dictates that the average fixed interest period on total borrowing may not exceed 24 months. Peab has chosen short fixed interest periods for outstanding credits. Per 31 December 2016 there were interest rate swaps of SEK 2,250 million (2,850) with maturity between 0 and 5 years at an effective interest rate of 2.7 percent (2.2) according to the table below. Peab pays a fixed annual interest rate and receives floating rates (Stibor 3 months) for the interest rate swap. Since Stibor 3 months was negative at the end of the year Peab will pay the floating rate as well. The swap agreement is recognised at fair value on the balance sheet day. Per 2016-12-31 this fair value was SEK -95 million (-137).

Interest rate derivates

MSEK Currency Effective rate % Amount SEK Matures 2016 Matures 2017 Matures 2018 Matures 2019 Matures 2020 Matures 2021 Matures 2022-
Interest rate swaps 2016-12-31 SEK 2.7 2,250 850 1,150 250
Interest rate swaps 2015-12-31 SEK 2.2 2,850 600 850 1,150 250

As the table below shows, the fixed interest period for SEK 3,622 million (4,150) of the Group’s total interest-bearing liabilities, including derivatives, is less than 1 year. Interest-bearing asset items totaling SEK 916 million (842) have short fixed interest periods, with the result that the fixed interest period for SEK 1,644 million (2,435) of Group net debt, including derivatives, is less than 1 year, making these liabilities directly susceptible to changes in market interest rates. Since the majority of the financial liabilities have a short maturity most of the interest rate risk is considered a cash flow risk. For further information see the sensitivity analysis in the Board of Directors’ report.

Fixed interest rate period on utilized credits, excluding derivates per 31 December 2016

Fixed interest period Amount, MSEK Average effective interest rate, percent Share, percent
2017 5,022 1.4 100
2018- 0 0.0 0
Total 5,022 1.4 100

Fixed interest rate period on utilized credits, including derivates per 31 December 2016

Fixed interest period Amount, MSEK Average effective interest rate, percent Share, percent
2017 3,622 2.5 72
2018- 1,400 2.7 28
Total 5,022 2.6 100

Currency risks

The currency risk that fair values and cash flows from financial instruments may fluctuate with changes in the value of foreign currencies is referred to as a currency risk.

Financial exposure

Group borrowing is done in local currencies to reduce currency risks in operations. Assets and liabilities in foreign currency are translated at the rate on the balance sheet date. Borrowing in the interest-bearing liabilities per 31 December 2016, including leasing but excluding currency and interest rate derivatives, was allocated as follows:

  2016-12-31  2015-12-31 
Local currency in millions  MSEK Local currency in millions  MSEK
SEK 3,625 3,625 5,456 5,456
EUR 92 883 77 702
NOK 487 514 253 242
Total 5,022 6,400

Internal loans from Peab Finans AB are used to handle temporary liquidity needs in Peab’s foreign operations. Currency swaps are used to eliminate exchanges risks. Currency swaps usually run less than three months. Currency swaps are reported at fair value in book closing and value changes are reported as unrealized exchange rate differences in the income statement and as current receivables and liabilities in the balance sheet. At the end of the year, there were EUR 50 million (32) in outstanding currency swaps relating to financial exposure. Of the currency swaps referring to financial exposure EUR 42 million (32) are a hedge for the shareholding in Lemminkäinen Oyj. Exchange rate differences in net financials items from financial exposure were SEK -7 million (-23). Exchange rate differences in operating profit were SEK -2 million (1).

Exposure of net assets in foreign currency

The translation exposure arising from investments in foreign net assets is primarily hedged through loans in foreign currency or forward exchange contracts. At the end of 2016 hedges in forward exchange contracts in EUR for foreign net assets in Finland were EUR 10 million (10).

Foreign net assets

Local currency in millions 2016 Of which hedged 2015 Of which hedged
NOK 822 – 922 –
EUR 38 10 28 10
PLN 1 – 3 –

A 10 percent stronger euro rate on 31 December 2016 would entail a positive translation effect on equity of SEK 27 million (16). A corresponding strengthening of the Norwegian crown would generate a positive translation effect on equity of SEK 87 million (88). The translation effects are calculated on that part of foreign net assets which are not hedged. The effects of corresponding exchange rate changes on profit for the year are limited.

Annual exchange rate differences in equity (net assets in foreign subsidiaries) amounted to SEK 166 million (-155).

Commercial exposure

Although international purchases and sales of goods and services in foreign currency are currently small, they are expected to increase as the competition grows regarding purchasing goods and services. Contracted or forecasted currency flows can be hedged for 12 months from the date of the contract. At the end of the year, there were exchange rate hedges related to forecasted currency flows of EUR 7 million (6).

Since anticipated currency flows are hedged there are no transaction or translation effects on equity (other than in the hedged reserve) or in profit for the year if currency rates change.

Share price risk

Peab is exposed to share price risk through shareholding in the listed company Lemminkäinen Oyj. On closing date the total reported value of this holding was SEK 480 million (310).

Credit risk

Credit risk refers to the risk of a counterparty failing to meet their obligations.

Credit risks in financial instruments

Credit risks in financial instruments are very limited, since Peab only deals with counterparties with high credit ratings. Counterparty risks are primarily associated with receivables to banks and other counterparties involved in the purchase of derivatives. The financial policy contains special counterparty regulations which specify the maximum credit exposure for various counterparties. The framework agreement of the International Swaps and Derivatives Association (ISDA) is used with all counterparties in derivative transactions. The agreement entails that when a counterparty cannot settle its obligations in all transactions the agreement is discontinued and all outstanding dealings are then settled for a net amount. ISDA agreements do not meet the criteria for offsetting in the balance sheet. The information in the table below shows the financial instruments covered by ISDA agreements.

  2016 2015
Group, MSEK Financial assets Financial liabilities Financial assets Financial liabilities
Booked gross amount 12 95 5 145
Amount covered by netting agreement -12 -12 -5 -5
Net sum after netting agreement 0 83 0 140

Peab did not suffer any financial instrument losses in 2016. Total counterparty exposure related to derivative trading calculated as a net receivable per counterparty amounted to SEK 0 million (0) at the end of 2016. The estimated gross exposure to counterparty risks related to liquid funds and current investments amounted to SEK 1,062 million (873).

Credit risk in accounts receivable

The risk that Group customers cannot meet their obligations, i.e. payment is not received from customers, is a customer credit risk. Credit losses are relatively rare in the construction business since there are a great number of projects and customers that are invoiced at regular intervals during production. The Group’s customers undergo a credit rating control providing information on customers’ financial positions from various credit rating companies before a project is undertaken. The Group has established a credit policy for handling customer credit. For instance, it specifies where decisions regarding credit limits of various magnitudes are taken and how uncertain receivables should be handled. Bank guarantees or other collateral are required for customers with low credit ratings or insufficient credit history. The maximum exposure to credit risk is the reported value presented in the Group balance sheet. Total bad debts amounted in 2016 to SEK 14 million (8). The credit quality in accounts receivable that are not yet due and not written down is considered good.

Age analysis, overdue not written down accounts receivable

Group, MSEK 2016 2015
Accounts receivable, not mature 6,612 5,022
Accounts receivable, overdue 0 – 30 days 570 508
Accounts receivable, overdue 31 – 90 days 284 466
Accounts receivable, overdue 91 – 180 days 134 155
Accounts receivable, overdue 181 – 360 days 49 38
Accounts receivable, overdue > 360 days 623 290
Total 8,272 6,479

Accounts receivable written-down

Group, MSEK 2016 2015
Opening balance 44 28
Reversed write-downs -10 -7
Write-downs for the year 17 23
Translation difference 0 0
Balance carried forward 51 44

There are no mature receivables of significant amounts for other financial receivables.

Offsetting agreements

The financial instruments below are covered by a binding agreement concerning offsetting. The agreement on offsetting means that repayment of loans and the redemption of preference shares must take place at the same time. Offsets have therefore been recognized on the balance sheet.

Group, MSEK 2016 2015
Holding of preference shares in a joint venture – 2,667
Interest-bearing long-term liabilities in a joint venture – -2,667
Total – 0

Capital management

Peab aims to have a good capital structure and financial stability in order to provide a stable basis for continuing business activities, thereby enabling the company to keep existing owners and attract new ones. A good capital structure is also intended to promote the development of good relations with the Group’s creditors in a manner which benefits all parties.

Capital is defined as Equity and refers to equity attributable to shareholders in the parent company.

Equity

Group, MSEK 2016 2015
Share capital 1,584 1,584
Other contributed capital 2,576 2,576
Reserves -153 -504
Retained earnings including profit for the year 5,373 4,420
Equity attributable to shareholders in parent company 9,380 8,076

One of Peab’s financial targets is an equity/assets ratio (equity divided by the balance sheet total) in excess of 25 percent. The Board of Directors believes that this level is well suited to Peab’s construction and civil engineering activities in Sweden, Norway and Finland. The target is a part of the Group’s strategic planning. If the equity/assets ratio is expected to exceed this level on a permanent basis, the capital should be transferred to the shareholders in an appropriate form. The equity/assets ratio at the end of 2016 was 29.7 percent (28.8).

It is the ambition of the Board of Directors to preserve a balance between a high rate of return on equity, which can be done through increased lending, and the security and benefits associated with a higher equity ratio. Therefore, one of Peab’s financial targets is a return on equity (profit for the period attributable to holders of participations in the parent company divided by the average equity attributable to holdings of participations in the parent company) in excess of 20 percent. The return on equity was 20.1 percent (9.9) at the end of 2016. The Board believes the target figure is a long-term relevant level for Peab. By way of comparison, the Group’s average interest expenses on interest-bearing borrowing, including derivatives, were 2.6 percent (2.4) on 31 December 2016.

Peab´s target concerning dividends is an annual distribution of at least 50 percent of profits after tax to shareholders. The level of dividends should be reasonable in relationship to developments in Peab´s profit and consolidation requirements. An ordinary dividend of SEK 3.60 per share (2.60) is proposed for 2016. Calculated as a share of the Group’s reported profit after tax, the proposed dividend amounts to 61 percent (96). Excluding the 1,086,984 B shares owned by Peab AB on 31 December 2016, which do not entitle to dividends, the proposed dividend is equivalent to a total dividend distribution of SEK 1,062 million (767). Besides the ordinary dividend, extra cash dividends may be proposed if the Board of Directors finds there are sufficient funds which are not considered necessary to Group development. Extra dividends may also be made in other forms besides cash.

At the start of 2016, Peab’s holding of own shares amounted to 1,086,984 B shares, corresponding to 0.4 percent of the total number of shares. On 10 May 2016, the Peab Annual General Meeting authorize the Board of Directors to acquire at the most the number of shares in Peab AB such that after acquisition Peab would hold a maximum of 10 percent of the registered shares in the company. During 2016 no repurchases or divestitures have taken place. The purpose of the purchase of own shares is to improve the capital structure of the company or to be used in the financing of acquisitions.